New Delhi: The government may soon float a cabinet note on a proposal to form a mechanism to recover from importers of non-urea fertilizers any additional benefit they may get each time the government raises subsidies on such fertilizers. The move could lead to conflict between the government and the fertilizer industry.

The government had first said that it would recover such benefits due to subsidy increases between April 2010 and 2011 via an 11 July notification. It now wants to institutionalize such a mechanism.

A file photo of people loading fertilizer

The issue relates to the import of non-urea fertilizers including di-ammonium phosphate (DAP) and muriate of potash (MoP), which are the two main fertilizers in this category. On 11 November, Mint had first reported that India was likely to spend upwards of 70,000 crore on non-urea subsidy this year, out of a total subsidy bill that could touch 95,000 crore.

The government typically pegs the subsidy it offers to the prevailing long-term contracting rates in the international market. In 2010-11, the subsidy for DAP was fixed at a long contract price of $500 per tonne, while the same for MoP was fixed at $350 per tonne. In April 2011, the government raised the subsidy on both fertilizers and the levels for DAP and MoP reached $612 and $420, respectively.

Officials say the government wants to recover the subsidy for inventories on finished products and raw materials that were contracted before 1 April, but were sold after that date.

“The idea is to not let companies get away with undue gains that they have made on account of an increase in subsidy as well as an inordinate increase in the retail price of the products after April 2011," said one of the officials cited above. “In other words, companies have gained on both ends, which is what we want to check."

The second official said that while numbers were still being worked out, the inventory for which recoveries need to be made could be in the range of a million tonnes, across various fertilizers.

In April 2010, the government had freed the retail prices of all non-urea fertilizers, but had asked companies to not raise the same beyond 10% of the prevailing price for the first year.

In April this year, this restriction was removed. While the retail price of DAP in April 2010 was 9,950 per tonne, the same was hovering around 18,350 per tonne in October this year.

The retail price of MoP has risen from 5,055 per tonne to 11,300 per tonne in the same period.

An official of the Fertiliser Association of India, an industry lobby group, said that the industry was opposed to the move as it would impact bottom lines of companies. “We have sent several representations to the government, but there has been no positive response yet," he said.

Tarun Surana, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd, said that while no official data on the total amount to be recovered this year is available, unofficial estimates put it in the range of 500-600 crore.

The first official, however, said that more significant than the amount in question was the fact that such an institutional mechanism could become a cause of friction between the government and industry, each time the former raises the subsidy in the future.